The miracle of “compound interest”

The sad truth is that most of us we start saving and planning for a financially secure retirement way too late. If we start saving for our retirement in our 20s, achieving the ultimate objective is easily possible, whereas starting  20 years later ( 20 missed years) makes the goal almost  unachievable. The reason being the amazing growth achieved on those early years of savings due to the compounding of investment returns over those “missed 20 years”. Einstein referred to compound interest as the eighth wonder of the world and the results need no explanation as the compounding of investment return over a 40 year period can be nothing short of astounding!

In last month’s article I stressed the importance of starting to save as early as the first salary cheque and  outlined some of the advantages of Retirement Annuities. Some of my clients have suggested that it may be okay to start saving later as long as you save more due to your shorter time horizon. Wow, that can be really difficult to do and the truth is, delaying your retirement planning can cost you way more than you might think.  The secret of having enough money is not necessarily saving huge amounts of money, although though this would always be a good idea, the secret really lies in starting early!

The earlier you start, the more advantage you can take of compound interest, and the more your money will grow.  To benefit from compound interest, you have to keep reinvesting the interest you earn on your investments so that you earn interest on your interest.  For example, if R100 grew by 10% per year, after the first year you would have R110.  The next year, you would earn interest on R110, giving you R121.  To achieve the best investment returns through compound interest, the secret is to start saving as early as possible.

The following case study shows the effect of compound interest and the benefits of starting to save early.

The above example shows how starting earlier can make all the difference.  Even though John and Frank invested the same amount each year, Chris had a head start of 8 years and invested R14 000 more than Frank.  By starting earlier, John managed to accumulate almost R550 000 more than Frank because of the compounded return he achieved on that earlier R14 000 which Frank missed out on.

Some smart saving tips:

• Think about tomorrow, even if it means making sacrifices today in order to have more money later on.
• Make saving part of your monthly budget.  If you can budget to pay your accounts, you can budget for a small investment every month.
• Try to increase your monthly savings amount each year to make sure you are keeping up with inflation.
• Once you decide to invest, you should consider getting a good financial adviser to give you advice on where to invest your money.
• Ask your financial adviser to help you draw up a financial plan and then stick to it.
• Budget for unexpected events, such as death and disability, as well as expected events, such as your children’s education.

Don’t let time eat away at your retirement savings – start planning today to make sure you are prepared.

Read more about Janine Player or call her on 033 343 1689.